Red Hat, Inc. (RHT)

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Red Hat Inc. (RHT)

F2Q2011 Earnings Call Transcript

September 22, 2010 5:00 pm ET

Executives

Tom McCallum – VP, IR

Jim Whitehurst – President & CEO

Charlie Peters – EVP & CFO

Analysts

Adam Holt – Morgan Stanley

Heather Bellini – ISI Group

Kash Rangan – Merrill Lynch

Sarah Friar – Goldman Sachs

Michael Turits – Raymond James

Trip Chowdhry – Global Equities

John DiFucci – JP Morgan

Tim Klasell – Stifel Nicolaus

Ed Maguire – CLSA

Todd Raker – Deutsche Bank

Steve Ashley – Robert W. Baird

Nabil Elsheshai – Pacific Crest Securities

Katherine Egbert – Jefferies

Brent Thill – UBS

Brad Whitt – Gleacher

Joel Fishbein – Lazard Capital

Presentation

Operator

Welcome, ladies and gentlemen. My name is Gerald and I will be your conference operator. At this time, I would like to welcome everyone to Red Hat’s Q2 2011 earnings conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you.

I would now like to turn the conference over to Mr. Tom McCallum, Vice President of Investor Relations. Sir, you may begin.

Tom McCallum

Thank you. Hello, everyone. Welcome to Red Hat’s earnings call for Q2 of our fiscal year 2011. Speakers for today’s call will be Jim Whitehurst, President and CEO and Charlie Peters, Executive Vice President and CFO.

Our earnings press release was issued after the market close today, and may be downloaded from Redhat.com on the Investor Relations page. Also on this page, you will be able to find a historic reconciliation schedule of GAAP to non-GAAP financial metric, as well as a schedule on currency rates.

Various remarks we may make about the company’s future expectations, plans and prospects including the statements containing the words believe, anticipate, plan, project, estimate, expect, intend, or will constitute forward-looking statements for the purposes of the Safe Harbor provisions under the Private Securities Litigation Reform Act of 1995.

Actual results may differ materially from those indicated by these forward-looking statements as a result of various important factors including those discussed in the company’s most recent Quarterly Report on Form 10-Q filed with the SEC.

In addition, any forward-looking statements represent our estimates or views only as of today, September 22, 2010, and these estimates and views may change. While the company may elect to update forward-looking statements at some point in the future, we specifically disclaim any obligation to do so, even if our estimates or views do change. And therefore, you should not rely on these forward-looking statements as representing our estimates or views as any date subsequent to today.

With that I’d like to turn the call over to Jim.

Jim Whitehurst

Thank you, Tom, and let me add my welcome to all of you joining on today’s call. I am pleased to announce another quarter of strong execution by our Red Hat associates, which drove financial results well above our expectation.

In the quarter, we saw solid demand for our open source products, strong renewals and continued spending on new projects. The combination of strong second quarter results and momentum going into the second half of the fiscal year provides us with the confidence to raise our full year growth outlook, which Charlie will talk more about in detail in a moment.

Here are a few of the financial highlights for the quarter. First, sales execution was once again strong in Q2. Demand for our subscriptions remained strong and demand for services has continued to rebound.

For the second quarter in a row, we delivered 20% year-over-year organic revenue growth, and despite foreign currency headwinds, our revenue growth rates through the first of this year have outpaced last year’s double-digit growth.

Second, we continued to invest in both sales and engineering allowing us to expand our portfolio of solutions in middleware, cloud computing and virtualization.

In addition, we continued to prepare for the public release of Red Hat Enterprise Linux 6 later this year. While our investments in growth initiatives have enabled Red Hat to deliver higher growth rate, we also continue to manage our overall cost structure effectively, which resulted in strong operating income growth and expanded margin.

Third, we continue to see strong renewals in our largest deal. I’m pleased to report that all of our top 25 deals that were up for renewal in the second quarter not only renewed, but did sell at a total value of over 120% of original value.

The value that customers receive from a Red Hat subscription is key to strong renewals with our large customers into up-selling and cross-selling additional products to our large and growing customer base.

In fact, this quarter, our largest renewal came from a previous free to paid customer who originally signed a large deal three years ago. This customer renewed in Q2 for over 250% of the original order, expanding RHEL in their enterprise while replacing additional free Linux, UNIX and Windows. We also added RHEL management to achieve an even better ROI on their investment.

Now let me update you on just a few of the exciting announcements that we made during our last fiscal quarter at our premiere user event, the Red Hat Summit and JBoss World.

We introduced developments in our Cloud Foundations portfolio that promote consistency between enterprise applications in the cloud. This strategy has received substantial industry support from customers to partners to industry analysts.

As a strategic provider of cloud infrastructure to our customers, our flexible cloud stack will enable customers to build and run applications across physical servers, virtual platforms, private cloud and multiple public cloud.

Read the rest of this transcript for free on seekingalpha.com